Target Canada to expand some stores opening in 2013

As Target’s full marketing assault kicks into high gear in the coming weeks, the company has placed its bull’s-eye directly upon rival Walmart. Read more

TORONTO — Target Corp. could be more of a competitive threat than rivals previously imagined this year in Canada as the mass merchant announced a deal with landlords on Wednesday that will enlarge the square footage at a third of its 124 locations opening in 2013.

Target, which announced slightly more than two years ago that it had acquired the vast bulk of Zellers’ leases from Hudson’s Bay Co. for $1.8-billion, has spent the past year building three distribution centres in Canada, renovating stores, building and deploying an IT platform, and hiring thousands of staff for all levels of its operation. It also began asking landlords to look at how many of their malls had adjacent open sites for further investment, John Mulligan, chief financial officer, told analysts during a conference call announcing fourth-quarter results.

“The sites we obtained in the Zellers deal were extremely well located with very attractive leases, were notably smaller than stores we open in the U.S., and in very poor physical condition,” Mr. Mulligan said. “We have decided to expand 40 sites beyond the space they occupied at Zellers stores, creating more than 600,000 square feet of retail selling space.”

The retailer also managed to negotiate its way out of the vast majority of its percentage of rent clauses with Canadian landlords, Mr. Mulligan revealed, which can kick in when retailers perform exceptionally well in a retail mall space. They are a regular feature of leases within Canada’s top retail malls.

Such clauses mean that if retail tenants exceed a certain point of gross retail sales in a year, a percentage of those sales would have to be given to the landlord as additional rent.

“They of course never impacted Zellers,” Mr. Mulligan said. “Per cent rent is not a meaningful issue for us going forward.”

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The deals are a testament to Target’s power even before it enters the market, said Alex Arifuzzaman, partner in Toronto retail real estate specialists InterStratics Consultants. “The landlords are willing to do that because they see Target as having a superior draw to Zellers that will benefit all of the retailers at their properties.”

Landlords will accordingly be able to ask for higher rents from other retailers at the mall, or perhaps attract new tenants, he said. “For some of these properties it will mean a total transformation.”

The company will now have capital expenditures of US$1.5-billion in Canada in 2013 to complete renovations and expansions, Mr. Mulligan said. The costs will negatively affect earnings per share by 45¢ this year, higher than the company had initially anticipated.

“The dilution is a bit higher even than we expected perhaps a year ago and all of that is attributable to independent capital investment decisions we’ve made,” he said.

Target earned US$961-million, or US$1.47 per share, for the three months ended Feb. 2, down from US$981 million, or US$1.45 per share, a year earlier.

Excluding the affect of Canadian launch expenses of US$148-million, earnings were US$1.65 per share, besting analyst estimates of US$1.48 per share, according to Thomson Reuters. Target had forecast adjusted earnings between US$1.64 and US$1.74 per share.

Revenue rose 7% to US$22.7-billion from US$21.3-billion.

Chief executive Gregg Steinhafel confirmed the company is on track for its store openings in Canada, and will open outlets in five waves before the Christmas season, “April, May, and every couple of months beyond that we are going to open somewhere between 20 and 28 stores a cycle.”

The company will do an unspecified number of so-called “soft openings” of stores in March and hold a grand opening event for all 24 of the Ontario stores opening in the first cycle in early April.

“The stores will open to the public in March and we will continue to fine-tune the guest experience as we approach our grand opening in April,” said Target Canada spokeswoman Lisa Gibson. Mr. Steinhafel said the company is seeking out more real estate to open stores in 2014.

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